Cogent’s Netcentric business growth at risk from net neutrality changes, says analyst

cogent service map (Cogent)
Image: Cogent

Cogent is seeing overall traffic rising in its Netcentric business—the unit that sells connectivity to content providers and other wholesale customers—but potential changes in net neutrality rules could cause headwinds in the near term.

Wells Fargo said in a recent research note that while Netcentric is growing, FCC Chairman Ajit Pai’s commitment to realigning net neutrality rules might dissuade content provider customers from aggressively rolling out new products.

“CCOI's traffic growth—a major driver of its Netcentric business—has been ~25-30% in 1H2017, well below its historical average of ~50%,” Wells Fargo said in a research note. “While some recent trends suggest it's modestly improving, we believe the regulatory uncertainty around net neutrality/Title II could inhibit new application development from its content customers. This near-term headwind, coupled with new contract pricing that continues to fall ~20-30% per year, will make it difficult to achieve ~8% Netcentric revenue growth in FY2017 and FY2018, in our view.”

RELATED: Cogent’s Schaeffer: NetCentric customers’ net neutrality concerns are temporary

During the second quarter, Cogent reported that NetCentric revenue grew 6.1% year-over-year, up from the 3.8% increase the service provider saw in the first quarter. As of the end of the quarter, Cogent had a total of 31,262 NetCentric customer connections.

At that time, the service provider noted that NetCentric revenue growth experienced more volatility than its corporate revenues due to the impact of foreign exchange and certain seasonal factors.

Dave Schaeffer, CEO of Cogent, said during the company’s second earnings call the growth trends it saw in the second-quarter came during what is traditionally a slower seasonal period. 

Dave Schaeffer, Cogent Communications
Dave Schaeffer

“We did see a slight increase in year-over-year traffic this quarter, and what was also encouraging is typically this time of year, traffic growth on a sequential basis is lower than it is earlier in the year, and we experience the same rate of sequential improvement,” Schaeffer said during the earnings call, according to a Seeking Alpha transcript. “Traffic growth continues to be driven by three factors, the number of people connected to the Internet, the amount of time they spend online and the bandwidth intensity of their applications.”

Schaeffer added that that the company is on track to see further growth in NetCentric over time.

“We feel very comfortable that traffic growth will continue to reaccelerate, and we will continue to gain market share,” Schaeffer said.

Wells Fargo acknowledged that while Cogent should still achieve decent growth for its Netcentric and corporate business lines, the results won’t meet the company’s typical 12% growth trends. In the second quarter, Cogent reported its corporate business grew sequentially at 2.9% and 11.9% year-over-year.

“While we expect the corporate business to remain stable and steady at a ~11-12% growth rate, we believe Netcentric revenues will grow by only ~5.7% in FY2017 and 7.0% in FY2018,” Wells Fargo said. “As a result, we are forecasting consolidated revenue growth to be 9.3% in FY2017 and 9.4% in FY2018—both very healthy numbers but below CCOI's target of 10-20% top-line growth and its historical ~12% growth rate.”